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Leading economic indicators decline in May

A widely watched gauge of economic activity slipped in May, the Conference Board said Thursday, suggesting that the nation’s economy is likely to cool in the coming months.
/ Source: The Associated Press

A widely watched gauge of economic activity slipped in May, the Conference Board said Thursday, suggesting that the nation’s economy is likely to cool in the coming months.

Also indicating that economic growth is losing steam, the Labor Department reported Thursday that the number of Americans filing claims for unemployment benefits climbed by the largest amount in five weeks.

“The two releases together suggest that the economy is currently enjoying sturdy growth, but growth is slowing, and will slow further in the months and year ahead,” said Mark Zandi, chief economist at Moody’s

The Conference Board, an industry-backed research group, said its Index of Leading Economic Indicators fell 0.6 percent to 137.9 in May after it declined 0.1 percent to 138.7 in April.

The May figure was in line with what analysts had expected.

The index is watched closely because it’s designed to predict economic activity three to six months in the future.

It was index’s third decline in six months, and the lowest figure since a reading of 136.9 in October. The drop in the index comes as gasoline prices run high, interest rates creep up, and the home sales market grows tepid.

“It does serve to confirm that the economy is slowing. That’s something that should come as no surprise, but we had some conflicting numbers earlier this week,” said Mark Vitner, senior economist at Wachovia Corp.

He noted that Tuesday’s housing construction figures from the Commerce Department gave some market watchers a false sense of optimism. The department reported that builders started construction at a seasonally adjusted annual rate of 1.957 million units last month, a better-than-expected 5 percent gain from April when construction had fallen 5.5 percent.

Seven out of the ten indicators that comprise the leading index decreased in May — the biggest negative contributor was average weekly initial claims for unemployment insurance, followed by consumer expectations, real money supply, average weekly manufacturing hours, building permits, stock prices and vendor performance.

Three indicators improved in May — manufacturers’ new orders for nondefense capital goods, manufacturers’ new orders for consumer goods and materials, and interest rate spread.

Over the last six months, the biggest negative contributor to the leading index’s drop has been declining housing permits.

Moody’s Zandi said he expects June’s index to be a bit more upbeat, as the stock market is somewhat firmer than it was in late May and initial claims for unemployment insurance seem to have stabilized.

The Labor Department’s report Thursday showed that 308,000 people filed for jobless benefits last week, a bigger-than-expected rise of 11,000 from the previous week.

“They’re still relatively low,” Wachovia’s Vitner said, adding that he expects to see seasonal increases in jobless claims going into the summer, as well as some modest climbs later in the year as the economy slows.

“The economy is still quite strong; it’s just beginning to cool off,” he added.

Analysts, who watch jobless claims as a signal for where the labor market is headed, believe job growth will flag as the year progresses, and layoffs will rise as businesses adjust their hiring plans in anticipation of a slowdown.

The increase of 11,000 was the biggest rise since an increase of 19,000 applications in the week ending May 13. The 308,000 total claims was the highest level since claims hit 337,000 in the week ending May 27.

The overall economy expanded at a rapid clip of 5.3 percent in the first three months of the year, but that growth rate is expected to slow to around 3 percent in the current quarter.

The Conference Board’s index of coincident indicators, which measures current economic activity, rose 0.1 percent to 122.7. The index of lagging indicators, which reflects past performance, rose 0.2 percent to 123.0.

Signs of a slowdown have already shown up in a surprisingly weak increase of just 75,000 new payroll jobs in May — 100,000 below what economists had expected.

The index’s drop was one of many factors weighing on stocks Thursday. The Dow Jones Industrial average fell 3.73, or 0.76 percent, to 10,995.73 in afternoon trading and the Nasdaq composite index lost 24.30, or 1.13 percent, to 2,116.90. Wall Street has recently been plagued by worries about rising energy prices, inflation and a plodding economy.